One way business owners can save money in taxes is by having a retirement plan.
You may wonder:
- What is the best retirement plan for a small business owner?
- How do small business owners retire?
- How do small business owners invest?
- How much money can a small business owner put in a retirement plan?
In this article, I’m going to go through some of the best retirement plans business owners in New York can use to:
- Retire comfortably
- Save lots of money in taxes
For more ways to save money in taxes, be sure to check out this video that goes through how business owners in New York can save $10K, $20K, $50K or more in taxes each year by making ONE simple change to their finances.
If you prefer to watch a video version of this article, go here:
SIMPLIFIED EMPLOYEE PENSION (SEP) PLAN
A SEP retirement plan allows you to contribute up to 25% of your salary, be it the employer or employee’s salary, or the self-employed salary if someone is self-employed.
Some big advantages are that there’s no paperwork, and you can contribute up to $58,000 per employee in the year 2021.
A challenge for the SEP plan is that the business has to contribute for the employee.
There are no employee contributions, and that could be difficult to deal with.
This is very good if you have part-time or no employees.
It’s great for somebody that doesn’t earn a huge salary but wants to contribute a lot to their retirement plan. You can make a large contribution up to $58,000 in the year 2021 with a solo 401k.
There’s also very minimal paperwork to set this up.
A simple plan is, well, simple.
It’s good if you have a lot of employees and you don’t want to spend a lot of time being involved with retirement plans. It’s mostly funded by employee contributions. So the employer doesn’t have to worry about taking on a huge expense.
The employee can contribute up to $13,500 in the year 2021.
If the employees are age 50 and over, they can contribute an additional amount after that. The employer would also be able to contribute a reasonable amount of 2 or 3%.
As the name suggests, there’s very minimal paperwork with a Simple Plan.
A 401k plan generally allows an employee to contribute $19,500 dollars a year (in the year 2021).
The total amount that could be contributed is $58,000 in the year 2021, depending on if an employer wants to make some contributions.
The disadvantage of the plan is the fact that you have to file paperwork. And not filing the paperwork properly or on time could result in penalties.
The 401K gives you a situation where you can have a good mix of both the employee and employer making contributions.
DEFINED BENEFIT PLAN
A defined benefit plan is great if you want to make large retirement contributions.
Maybe you haven’t made any contributions until now or maybe you’re in a situation where you want to save a lot of money in taxes.
A defined benefit plan is a great way to do this.
However, one disadvantage is that you have to spend money on an actuary and make sure to follow the forms, as there could be big penalties if you don’t.
Another disadvantage is that you have to make some smaller contributions for other employees.
The disadvantages are outweighed though, as being able to give a very large contribution and reduce your income is a large advantage.
Plus, a lot of the time, a taxpayer is allowed to be the recipient of other tax benefits being in a lower bracket.
WHICH RETIREMENT PLAN IS BEST FOR MY BUSINESS?
The answer to this question depends on your current situation and your goals.
It can be confusing and difficult to do this all on your own.
That’s why for our clients we analyze their situation and help you implement the best solution for your unique circumstances.
To see how we can help you save money in taxes through a retirement plan and other tax saving strategies, click here to schedule an appointment.
Want more tax saving tips? Be sure to check out the video I recorded here on how to save $10K, $20K, $50K or more in taxes by making ONE simple change to your finances